RBI Cuts Repo Rate to 5.25%: Impact on Loans, Inflation and Economic Growth in India

The Reserve Bank of India (RBI) announced a reduction in the repo rate by 25 basis points from 5.5% to 5.25%, as confirmed by Governor Sanjay Malhotra this morning. The decision prioritizes economic growth while disregarding concerns about the rupee's recent depreciation.

Following a comprehensive three-day meeting of the RBI's Monetary Policy Committee (MPC), which convenes bimonthly to determine central bank strategy, the decision was reached unanimously. The committee balanced considerations between historically low inflation and the rupee's decline to its lowest point yesterday.

The MPC had previously decreased the key lending rate in June from 6% to 5.5% due to easing inflation pressures. This latest reduction is anticipated to result in more affordable housing and vehicle loans for consumers.

Governor Malhotra indicated that retail inflation is expected to be lower than previously projected, with core inflation pressures falling below headline estimates. The Consumer Price Index (CPI) inflation has been revised downward to 2% for FY2025-26.

For Q1 of FY2026-27, inflation is now forecasted at 3.9%, down from the earlier projection of 4.5%. Rising precious metal prices are expected to contribute to the headline CPI. Malhotra noted that risks to the inflation outlook remain balanced.

The RBI has significantly upgraded its Gross Domestic Product (GDP) forecast for the current financial year to 7.3%, up from its previous estimate of 6.8%. The GDP projection for the current quarter (October-December) has also been revised upward to 6.7% from 6.4%.

The previous quarter recorded a six-quarter high GDP growth of 8.2%. Malhotra emphasized that the current growth-inflation balance continues to provide policy space for adjustments.

In addition to the repo rate adjustment, the MPC also modified the Standing Deposit Facility (SDF) to 5% and Marginal Standing Facility (MSF) to 5.5%.

The RBI has further decided to implement forex swaps and purchase bonds worth Rs 1 lakh crore through Open Market Operations (OMO) auctions. These measures aim to enhance monetary transmission and ensure adequate market liquidity.

Reflecting on 2025 as the year concludes, Malhotra highlighted that despite ongoing geopolitical and trade uncertainties, the year witnessed strong growth and manageable inflation.

The RBI maintains a neutral stance as it approaches the new year with renewed optimism and determination. Malhotra added that the bank's financial parameters remain robust, with bank credit experiencing growth, particularly in retail lending, which continues to support economic expansion.